Macrosynthesis

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TLDR

• Market volatility is back
• Why the market needs a rate cut
• Economic data shows U.S. economy slipping
• U.S. Manufacturing data falls to annual low
• Gold continues hot streak
• Intel stock sinks, company lays off 15% of workers
• Pinterest is no match for burgers

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The Stock Market is Now Needing, not Wanting, a Rate Cut

Federal Reserve Chair Jerome Powell announced that the Fed may cut interest rates in September due to progress in reducing inflation and a cooling job market. The current rate remains at 5.3%. Powell emphasized that while inflation continues to fall, a rate cut could be considered if this trend persists. Markets, however, currently expect a .5% September rate cut. The potential reduction aims to lower borrowing costs and support economic growth, despite the US GDP exceeding expectations at 2.8% last week. However, the US unemployment rate spiked to 4.3% last week as the job market slowdown steepens further. In July 2024, the US economy added 114K jobs, the lowest in three months, below the 12-month average of 215K. Gains were seen in health care, construction, and government, while the information sector saw job losses.

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Although markets initially surged after the rate decision, with shares of Invesco QQQ (the market-cap-weighted Nasdaq) bouncing nearly +3% on Fed day after being down nearly 10% from its one-month high, they have since slipped over -5.5%. This was largely due to a report of slowing manufacturing data as well as disappointing earnings reports by Microsoft, Amazon, Intel, and Booking.com. In our view, MSFT and AMZN delivered amazing reports and Amazon itself is now on sale. But investors were looking for a reason to break up with them.

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The mass purchasing of 10-year Treasury bills last week drove the yields down by .4 percent, the biggest purchase since the end of 2018. The last time the move was this big was 2008, indicating the bond investors are bracing for a recession. On the other hand, they have been waiting nearly two years to make this switch and it finally became clear it was time to lock in yields.

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On Thursday, the SPY fell over 2.5% after the rebound and continued to decline, ending the week down another 2.5%. The VIX - the market's fear gauge - rocketed over 50% as well.

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The Nasdaq 100 Index (QQQ) entered correction territory, down -10% from peak - losing over $2 trillion in value as traders withdrew from Big Tech. Notable declines include Nvidia and Tesla, down over 20% from recent highs. Despite these losses, tech stocks remain higher for the year.

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Sector Focus

Investors are shifting focus to defensive sectors like utilities and consumer staples stocks, anticipating Federal Reserve rate cuts in September and lower earnings growth for tech stocks given high capital expenditures to support AI growth.  The 20-YR Treasury ETF, the TLT, rose +5% last week, signaling investors were eager to lock in yields amidst a fading market backdrop.

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Gold Prices Surge on Uncertainty, Rate Cut Hopes

Gold surged to a record high of over $2,474 per ounce on August 2nd. The spike followed a weak US jobs report, with only 114,000 jobs added in July, missing expectations and driving unemployment to 4.3%. Concerns over a slowing labor market, alongside missed corporate earnings and contraction in manufacturing, fueled demand for safe-haven assets. Tensions in the Middle East also contributed to the rise in gold prices.

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Bank of Japan Raises Rates, U.K. Cuts Them

Japan’s central bank raised its key interest rate to 0.25%, the highest since December 2008, and announced plans to halve its bond-buying pace over two years. The yen strengthened against the dollar, and bank stocks surged nearly 5%. This move signals a shift towards policy normalization under Governor Kazuo Ueda. However, Japanese stocks experienced the worst decline since Black Monday in 1987 on Friday.  Across the world, the Bank of England cut rates 25 basis points on easing inflation data.

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Next Week

This week, key reports in the US include the ISM Services PMI and the trade balance. The earnings season continues, with notable results from Amgen, Caterpillar, Uber, Airbnb, Walt Disney, Eli Lilly, SoftBank, and Siemens. In China, important data to watch are the Caixin Services PMI, trade balance, and producer and consumer inflation figures.

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Commodity Movers

Propane

-8.14%  (1W Chg)

-14.21% (1M Chg)

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Gold

+2.36% (1W Chg)

+26.33% (YoY Chg)

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Butter

+5.37% (1W Chg)

+58.21% (YoY Chg)

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Potatoes

-9.14% (1W Chg)

-19.29% (1M Chg)

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Noteworthy Events    

Shake Shack Surges on Earnings Growth

Shake Shack shares surged after the company beat quarterly profit and sales estimates, driven by higher prices and a 4% increase in same-store sales. The chain reported a 16% revenue rise to over $316 million and projected positive free cash flow for the first time since 2017.

Door Dashed Up Despite Earnings Miss

DoorDash shares rose 11.8% after-hours on August 1st despite a larger-than-expected Q2 loss of $157 million. Revenue increased 23% to $2.63 billion, driven by strong consumer adoption and efficiency improvements.

Amazon Drops After Disappointing Guidance

Amazon's stock fell over 11% on August 2nd after forecasting Q3 sales and operating income slightly below expectations. Despite beating Q2 earnings estimates by 20% with an EPS of $1.26 and generating $148 billion in revenue, investors focused on the slightly weaker outlook. Amazon's cloud segment, AWS, performed strongly, but the company's investments in AI and cloud infrastructure weighed on investor concerns.

Intel Drops on Layoffs and Earnings Miss

Intel shares plunged 28% following disappointing earnings results and an announcement to lay off 15% of its workforce. This triggered a global semiconductor stock sell-off, affecting major players like Samsung, TSMC, and ASML.

Pinterest Shares Plunge Over -14% As Investors Get Picky

‍Pinterest shares fell over -14% on July 31st after the company's third-quarter revenue guidance of $885 million to $900 million fell short of the $908.6 million analysts expected. Despite this, Pinterest's second-quarter revenue rose 21% and its net income was up 125% year over year.  Monthly active users and revenue per user also grew 12% and 8% respectively.

Match Group Stock Soars on Return to Revenue Growth

Match Group shares surged after reporting second-quarter revenue of $864 million, surpassing the $856.5 million analyst estimate. Revenues per user increased 9% while its Hinge app grew revenues by 48% among key demographic groups that had previously been hard to reach.

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Upcoming Catalysts:

EARNINGS

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Monday

• Carlyle Group (CG)
• Tyson Foods (TSN)
• ONEOK (OKE)
• Vista Outdoor (VSTO)

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Tuesday

• Caterpillar (CAT)
• Bloomin Brands (BLMN)
• Duke Energy (DUK)
• Hyatt Hotels (H)
• Airbnb (ABNB)
• Flywire (FLWY)
• Toast (TOST)

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Wednesday

• Walt Disney (DIS)
• Hilton (HLT)
• International Seaways (INSW)
• Robinhood (HOOD)
• Caci (CACI)
• CoreCivic (CWX)

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Thursday

• Piedmont Lithium (PLL)
• Tennant (TNC)
• US Foods (USFD)
• Bloom Energy (BE)

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The LevelFields Team